Question

State Financial Corp. has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits and Loans). A summary of costs and other data for each department prior to allocation of service department costs for the year ended December 31 follows:

	Administration			Communications			Facilities			Deposits			Loans
Direct costs	$	200,000		$	300,000		$	254,000		$	8,000,000		$	5,000,000
Employee-hours		24,800			33,600			21,600			450,000			350,000
Number of employees		9			15			6			210			150
Square footage occupied		4,900			13,440			5,600			246,400			201,600

The costs of the service departments are allocated on the following bases: Administration, employee-hours; Communications, number of employees; and Facilities, square footage occupied. (Do not round intermediate calculations. )

Required:

a. Assume that the bank elects to distribute service department costs to production departments using the direct method. What amount of Communications Department costs is allocated to the Deposits Department?

b. Assume the same method of allocation as in requirement (a). What amount of Administration Department costs is allocated to the Loans Department?

c. Assuming that the bank elects to distribute service department costs to other departments using the step method (starting with Facilities and then Communications), what amount of Facilities Department costs is allocated to the Communications Department?

d. Assume the same method of allocation as in requirement (c). What amount of Communication Department costs is allocated to Facilities?

Answer 1

a.Under the direct method, the cost of service departments is directly allocated to the production departments without allocating the costs to other service departments.

amount of Communications Department costs is allocated to the Deposits Department = 300,000*210/360

= $175,000

b. amount of Administration Department costs is allocated to the Loans Department = 200,000*350,000/800,000

= $87,500

c.Step Down Allocation:

	Administration	Communication	Facilities	Deposits	Loans
Direct Costs	200,000	300,000	254,000	5,000,000	5,000,000
Facilities		7,320.32	(254,000)

Facilities department cost allocated to communications department = 254,000*13,440/466,340

= $7,320.32

d. amount of Communication Department costs is allocated to Facilities = (300,000+7,320.32)*6/375

= $4,917.13